It's not elected government's fault the private economy is imploding, but elected governments can and must act now to save it - and democracy - from a global depression.
I think there is a tighter frame that can be drawn around the relationship between neoclassical (vs fiscal policy) management of the economy, by focusing on income inequality and especially wage income.
I recently saw some commentary by RBC on the Canadian central bank’s 50 basis point reduction and it went something like this: “for every 1% increase in the employment rate, prices fall by .5%”. This was a comment in support of the rate cut, but is just…. I almost threw my phone across the room when I read it.
When someone gets laid off due to a “slowdown” they typically lose 50% or more of their income. Many folks are living paycheque to paycheque and this can be enough to push people out of housing onto the street. The fear of that happening is palpable.
We have arrived at this point after almost 50 years of flat wage growth adjusted for inflation, while profits have soared (as has executive compensation with professional employment close behind). This a direct result of “undoing” the fiscal and policy supports for working people in favour of corporations throughout the west but particularly in North America (and especially the US).
If ordinary people cannot afford to live without being in constant fear of losing their jobs and livelihoods they are susceptible to someone who has “all the answers” and who promises to take their fear away even if it at a loss to their liberty. A law prof I had called losing your job “corporate capital punishment” and while that is clearly hyperbole it can definitely feel like that if you lose your job.
So pursuing a “low inflation” target through the application of of a monetary policy hammer is outrageous for many reasons not least of which is the incredible human cost of wringing wage income out of the economy.
As for the impact on productivity I am not convinced that you can lay the blame for that on low interest rates. At the firm level lower interest rates reduce the rate of return required to justify purchase of new equipment or technology which generates increases to productivity across the economy.
When interest rates drop, it balloons the size of loans being offered. A 1% change in interest rates downward increases what banks will lend by $50,000 on a house - between $375,000 and $425,000. A 1% drop in interest rates can increase the price of a house by 7.5%, and houses are not productive investments. They are a personal asset that does not generate ongoing revenue.
The "real economy" cannot compete with gains like that, so investors pile into housing which continues to drive the bubble as the productive economy falters.
I wrote a paper about it that I presented at a conference in 2017.
Everywhere I looked the divergence in wage growth and inequality started around 1978. I asked myself what happened then and the answer is the adoption of anti-inflationary measures, which is all about the preservation of the relative value of existing assets, not about the creation of new ones.
In my very first post, I cited Edward Chancellor who wrote a book about this:
"Q: And you say it was wrong that central banks tried to combat this kind of deflation at all cost?
Chancellor: By aggressively pursuing an inflation target of 2% and constantly living in horror of even the mildest form of deflation, they not only gave us the ultra-low interest rates with their unintended consequences in terms of the Everything Bubble. They also facilitated a misallocation of capital of epic proportions, they created an over-financialization of the economy and a rise in indebtedness. Putting all this together, they created and abetted an environment of low productivity growth.
… By pursuing this policy of ultralow interest rates for so long, they have created a lot of fragility in the economy and the financial system. We used to refer to monetary policy after the financial crisis as «kicking the can down the road», remember? Well, they kicked the can for so long that we forgot that they were just delaying the day of reckoning. It will turn out to be largely impossible to normalize interest rates without collapsing the economy.”
Reducing interest rates has that impact in the housing market (drawing money in, inflating asset prices) and plays a role in share price “growth” as well but it doesn’t really factor into the ongoing decisions that businesses make about how to run their business (i.e., investing or not in new tech or machinery).
The other thing that happened in an around 1980 was a very visible change in policy around labour unions in both the US and Canada. It became much harder to organize, and many states in the US put “right to work” legislation in place that undermined existing unions as well. Watch also what happened to the minimum wage starting about that time. It was regularly increased through the 70’s then the increases just… stopped. With the ‘stagflation’ of the late 70’s then the run up of inflation in the early 80’s governments starting intervening directly in labour markets with “wage and price controls” that limited wage increases.
The term “wage price spiral” originated during that time and it became established opinion that wage demands “caused” inflation (“wage push” inflation). Once governments realized they could restrict wage growth through legislation they continued to do so by legislating wage growth in the public sector.
At the same time the Free Trade agreements were being negotiated largely without any protection for labour, so guys in Canada were suddenly competing with wages in Mexico, the US South, and Asia. The threat heard across the bargaining table was “this is all we can offer or else we will have to close and move”. Plants did close. In the wake of the first US/Canada agreement, for example, Heinz consolidated all of it production of everything manufactured in Canada back to plants in the US (except for baby food because Canadian regs required different nutritional content than the US).
I went through this, on both sides of the negotiating table as fate would have it. I know this is anecdotal but the pattern was repeated over and over and over… don’t discount the changes in labour market policy/trade as a major factor in depressing wage growth. Productivity growth “decoupled” from wage growth where it had been 1:1 pretty much from the end of WWII through 1978; after that, productivity increased but real wages did not.
It's insulting when Tiff Macklem says (and I'm paraphrasing), "No, I am not in the basement of the Bank of Canada printing money for the lulz." Because that isn't the accusation. The kind of damage control the Bank of Canada is doing is to raise a straw man argument. The fact is, a great number of Canadians know that our society is "printing" money (while knowing that it is in the form of data) into the accounts of people who aren't going to spend it into the real-world, life-sustaining economy. A PR strategy that treats us like we're stupid is bad for the value of that currency.
While I appreciate feedback on my posts, I also expect people to back up their arguments with facts. Inequality has been growing and it is the worst it has ever been in many countries.
A fallacy is an error in thinking. Whether inequality is increasing in most high income countries or not is matter of evidence - and it is absolutely increasing. In many cases, it is the highest it has ever been.
If you are going to make those claims, back them up/
I think there is a tighter frame that can be drawn around the relationship between neoclassical (vs fiscal policy) management of the economy, by focusing on income inequality and especially wage income.
I recently saw some commentary by RBC on the Canadian central bank’s 50 basis point reduction and it went something like this: “for every 1% increase in the employment rate, prices fall by .5%”. This was a comment in support of the rate cut, but is just…. I almost threw my phone across the room when I read it.
When someone gets laid off due to a “slowdown” they typically lose 50% or more of their income. Many folks are living paycheque to paycheque and this can be enough to push people out of housing onto the street. The fear of that happening is palpable.
We have arrived at this point after almost 50 years of flat wage growth adjusted for inflation, while profits have soared (as has executive compensation with professional employment close behind). This a direct result of “undoing” the fiscal and policy supports for working people in favour of corporations throughout the west but particularly in North America (and especially the US).
If ordinary people cannot afford to live without being in constant fear of losing their jobs and livelihoods they are susceptible to someone who has “all the answers” and who promises to take their fear away even if it at a loss to their liberty. A law prof I had called losing your job “corporate capital punishment” and while that is clearly hyperbole it can definitely feel like that if you lose your job.
So pursuing a “low inflation” target through the application of of a monetary policy hammer is outrageous for many reasons not least of which is the incredible human cost of wringing wage income out of the economy.
As for the impact on productivity I am not convinced that you can lay the blame for that on low interest rates. At the firm level lower interest rates reduce the rate of return required to justify purchase of new equipment or technology which generates increases to productivity across the economy.
When interest rates drop, it balloons the size of loans being offered. A 1% change in interest rates downward increases what banks will lend by $50,000 on a house - between $375,000 and $425,000. A 1% drop in interest rates can increase the price of a house by 7.5%, and houses are not productive investments. They are a personal asset that does not generate ongoing revenue.
The "real economy" cannot compete with gains like that, so investors pile into housing which continues to drive the bubble as the productive economy falters.
I wrote a paper about it that I presented at a conference in 2017.
Everywhere I looked the divergence in wage growth and inequality started around 1978. I asked myself what happened then and the answer is the adoption of anti-inflationary measures, which is all about the preservation of the relative value of existing assets, not about the creation of new ones.
In my very first post, I cited Edward Chancellor who wrote a book about this:
"Q: And you say it was wrong that central banks tried to combat this kind of deflation at all cost?
Chancellor: By aggressively pursuing an inflation target of 2% and constantly living in horror of even the mildest form of deflation, they not only gave us the ultra-low interest rates with their unintended consequences in terms of the Everything Bubble. They also facilitated a misallocation of capital of epic proportions, they created an over-financialization of the economy and a rise in indebtedness. Putting all this together, they created and abetted an environment of low productivity growth.
… By pursuing this policy of ultralow interest rates for so long, they have created a lot of fragility in the economy and the financial system. We used to refer to monetary policy after the financial crisis as «kicking the can down the road», remember? Well, they kicked the can for so long that we forgot that they were just delaying the day of reckoning. It will turn out to be largely impossible to normalize interest rates without collapsing the economy.”
Thanks for the reply, Dougald!
Reducing interest rates has that impact in the housing market (drawing money in, inflating asset prices) and plays a role in share price “growth” as well but it doesn’t really factor into the ongoing decisions that businesses make about how to run their business (i.e., investing or not in new tech or machinery).
The other thing that happened in an around 1980 was a very visible change in policy around labour unions in both the US and Canada. It became much harder to organize, and many states in the US put “right to work” legislation in place that undermined existing unions as well. Watch also what happened to the minimum wage starting about that time. It was regularly increased through the 70’s then the increases just… stopped. With the ‘stagflation’ of the late 70’s then the run up of inflation in the early 80’s governments starting intervening directly in labour markets with “wage and price controls” that limited wage increases.
The term “wage price spiral” originated during that time and it became established opinion that wage demands “caused” inflation (“wage push” inflation). Once governments realized they could restrict wage growth through legislation they continued to do so by legislating wage growth in the public sector.
At the same time the Free Trade agreements were being negotiated largely without any protection for labour, so guys in Canada were suddenly competing with wages in Mexico, the US South, and Asia. The threat heard across the bargaining table was “this is all we can offer or else we will have to close and move”. Plants did close. In the wake of the first US/Canada agreement, for example, Heinz consolidated all of it production of everything manufactured in Canada back to plants in the US (except for baby food because Canadian regs required different nutritional content than the US).
I went through this, on both sides of the negotiating table as fate would have it. I know this is anecdotal but the pattern was repeated over and over and over… don’t discount the changes in labour market policy/trade as a major factor in depressing wage growth. Productivity growth “decoupled” from wage growth where it had been 1:1 pretty much from the end of WWII through 1978; after that, productivity increased but real wages did not.
It's insulting when Tiff Macklem says (and I'm paraphrasing), "No, I am not in the basement of the Bank of Canada printing money for the lulz." Because that isn't the accusation. The kind of damage control the Bank of Canada is doing is to raise a straw man argument. The fact is, a great number of Canadians know that our society is "printing" money (while knowing that it is in the form of data) into the accounts of people who aren't going to spend it into the real-world, life-sustaining economy. A PR strategy that treats us like we're stupid is bad for the value of that currency.
Superficially persuasive but many fallacies. For example inequality is not increasing in most high income countries. Be sceptical.
While I appreciate feedback on my posts, I also expect people to back up their arguments with facts. Inequality has been growing and it is the worst it has ever been in many countries.
A fallacy is an error in thinking. Whether inequality is increasing in most high income countries or not is matter of evidence - and it is absolutely increasing. In many cases, it is the highest it has ever been.
If you are going to make those claims, back them up/
“ We need a Marshal Plan to rescue democracy.” should be the title for this article, Dougald!
In the context of the US election result we are racing headlong into the worst of all possible worlds.